The ETF Portfolio

Key Points

• It is key for an investor to build a diversified portfolio while considering their costs. These costs can be explicit fund fees or just the opportunity cost of your time. 
• While we believe in selecting individual companies as an investor becomes more confident, we also view being in the right sector a key to success.
• Selecting individual companies can be tedious and time consuming, ETFs offer a way to gain exposure to a given sector at a typically low cost.
• The ETF landscape continues to broaden and offers investors many options to build out a portfolio. One important aspect to consider is the potential overlap of holdings(companies) that can exist between different ETFs when making considerations for investing.

Gain Exposure Into Different Sectors Through ETFs

Creating a diversified portfolio can be a time consuming challenge for investors. While some may be interested in performing the due diligence of researching individual stocks for the portfolio, others might want an alternative approach outside of this method. 

Developing an ETF Portfolio is a solid means by which to achieve this and inherently holds less risk than attempting to pick individual stocks. Picking the right stocks can be very rewarding, but in some instances it is really about Being in the Right Sector or an industry of the market.

One of the most popular investment strategies for investors has been in passive funds such as the S&P 500. However, it is possible that an investor holds a higher level of knowledge when it comes to certain industries and sees various factors in place for business growth moving into the future. 

Thus, they might desire more concentrated exposure into a select few names being underrepresented in a standard S&P 500 Index Fund.

Investing in an ETF allows an investor to purchase a single security giving them diversification into the very sector/industry they want exposure to for the portfolio. Having the portfolio allocated into various ETFs drastically mitigates the risk of picking the wrong company and instead allows for a focus on the outlook of an industry or sector.

Note: The terms sector and industry are used frequently throughout this article. While they are similar in definition, there are differences. For example,  a sector is broad like Technology whereas an industry might be more concentrated within a sector like Semiconductors when it comes to Technology.  

Hypothetical Example and Step By Step Investing Process Breakdown

An Investor bought into the S&P 500 a few years ago as a first step towards increasing their personal wealth but they also have an interest in staying up to date with technology. 

Realizing the disruption, and potential long-term tailwinds for technology businesses to grow moving forward; the investor becomes interested in gaining more exposure to this sector but they are not sure which company or companies to select. Apple? Tesla? Microsoft? Adobe? Salesforce? Paypal? Visa? Nvidia? 

Luckily, there are numerous technology ETFs for an investor to put their money into and many have had stellar returns over the past ten years all while giving the investor exposure to the technology companies they find interesting. 

At the end of the day, there is essentially an ETF for anything an investor might want to gain exposure to whether it be a trend, broad sector, industry, geographical area etc etc..

As time moves forward, an investor could continue to focus on industry outlooks and conduct extensive research on which industries/sectors they believe would result in superior returns over the long-term. This might be the result of the market severely undervaluing a basket of stocks in an industry or sector. 

Likewise, it might be that a particular basket of stocks has temporarily corrected itself from being overvalued, finally opening up an opportunity for an investor to gain exposure at a more attractive price and begin Dollar Cost Averaging(buying here and there as the price declines). 

What Should an ETF Portfolio Possibly Look Like? It Depends on The Investor

An S&P 500 Index Fund usually will be the all weather fund making up a larger percentage of an ETF Portfolio by standard practice. This depends on the investor.

Since the S&P 500 is well 500 established companies, the holdings(companies/stocks) will most likely overlap with some of the holdings in the ETFs an investor might be considering but again the investor really is looking to further concentrate into lets say Healthcare, Semiconductors, Industrials, Consumer Discretionary or even look outside of large caps and into a mid cap ETF for the portfolio based upon some recent research.

Here is a visual to help with understanding what an ETF Portfolio could look like.

While VOO(S&P 500) gives exposure to companies in the Healthcare Sector, the overall index fund is not as heavily weighted towards the whole Healthcare sector. Therefore, an investor who was feeling optimistic about VHT (Healthcare ETF) would have experienced these returns over the last 10 Years compared to an S&P 500 Index Fund.

What Should an Investor Consider When Selecting ETFs?

It is imperative that when selecting an ETF, an investor compares the fees associated with owning the fund(known as Expense Ratio) against other competing funds. This is the cost of owning the ETF for an investor.  

Likewise, it is also important to check what basket of company stocks currently makes up the larger percentage of the ETF and if it represents the names the investor really wants to own. An Investor can easily see this by looking at the holdings section of the ETF. 

Owning an ETF will require some research in regards to the companies that make up the core holdings of the fund. It is also important to look for overlap between ETFs! In some instances two ETFs an investor might be looking at will actually be pretty heavily weighted in the same companies. 

Example

iShares Semiconductor ETF (SOXX)

Conclusion

Creating an ETF portfolio can allow investors to gain exposure into undervalued sectors/industries of the economy where a rebound might look likely due to various indicators or even invest into disruptive trends.

Selecting an ETF goes along the lines of “I really am struggling to choose between a few stocks in this industry since the outlook seems very attractive. Therefore, I would like to buy a handful of the best ones to reduce my chance of single handedly picking the wrong one or two stocks.”

It is important to note that when an investor begins to make investment decisions outside of just purchasing a S&P 500 Index Fund, more risk becomes inherent due to concentration but the rewards also are potentially higher. 

Again, every fund holds underlying companies and it is important for an investor to have an understanding of their business models, and if they are on a strong footing financially. 

Here are Some Funds To Check Out when it comes to creating a diversified ETF portfolio.